Historic Low Mortgage Refinance Rates Provide Opportunity for Homeowners

Recent market volatility has brought an opportunity for homeowners to refinance their mortgage rates. The 10-year treasury rate that most mortgage loans are tied to has dropped to levels that are unprecedented. This, in turn, has put downward pressure on mortgage loan rates across the board.

The Federal Reserve’s emergency rate cut on March 3, 2020—with the possibility of further cuts in the near future—gives mortgagors a rare opportunity to refinance at historic low rates. According to Freddie Mac Primary Mortgage Market Survey as of March 5th, the average rate of a 30-year mortgage has dropped to 3.29%, from an average of 3.72% at the beginning of the year. Rates on 15-year mortgages have declined to 2.79%, from 3.16% over the same time period.

This opportunity is especially relevant for those who are at or near retirement. A lower rate can mean a significant reduction in monthly mortgage payments or an opportunity to reduce the term of the mortgage, allowing the mortgage to be paid down faster. If your goal is to reduce your monthly payment or pay off your mortgage faster, refinancing could be the answer for you. In both scenarios, this means saving thousands of dollars in interest charges over the lifetime of your loan.

Refinancing to Lower Your Payment

If you are at or near retirement then you are likely paying very close attention to your monthly expenses. Expenses like housing are usually considered to be a fixed expense with little opportunity to lower it. However, with the reduction in rates, it is possible to refinance your home and reduce your monthly payments. A portion of every monthly mortgage payment goes towards interest charges. If those charges are reduced due to a lower rate, your monthly mortgage payment will likely go down.

Those considering downsizing in order to reduce their monthly expense now have a new option. Due to the lower rates, you may find that you can stay in your current home without breaking your budget. The downside to this strategy is extending the amount of time before you pay off your loan. Let’s say you have 25 years remaining on a 30-year loan. If you refinance with a new loan and term, you could be extending another 30 years. This is in addition to the 5 years you have already been paying before your mortgage is paid off.

Refinancing to Reduce Your Loan Term

If you have good cash flow then refinancing to lower your payment may not be attractive to you. However, reducing the length of your mortgage may be more motivating. When you originally purchased your home, you may have utilized a 30-year mortgage to keep your payments in line with your cash flow. With lower rates comes the opportunity to keep your payment at or near current levels while reducing the number of years on your loan. The most common move is from a 30-year to a 15-year term, but it is important to remember that there are other options available as well. Sometimes moving to a 20-year or another term will allow you to keep your payments at their current level while shaving off years from your loan.

Additional Borrowing

Taking advantage of lower rates may also be beneficial to those who are looking to use equity in their home to finance other expenditures. Perhaps you have some much-needed repairs or improvements to your home. A refinance gives you the opportunity to borrow some of your home equity at lower rates and spread the repayment over the life of the mortgage. In addition, you may find this strategy useful to pay off other high-interest debts, such as credit cards or personal loans. As you would with any other loan, you should only cash out the amount of equity that you need.

Things to Keep in Mind

Mortgage lenders have definitely seen an increase in loan applications. If you are considering refinancing your mortgage rates, you will need to present documents, such as pay stubs and tax returns, so be sure to get those documents together early on in the application process.

Keep in mind that refinancing does come at a cost. Costs may include closing costs, surveys, appraisals, document fees, origination fees, and any additional fees added by the lender. If you are planning to sell your home in the near future or already have a competitive rate, it may not be to your advantage to refinance.

If you are still unclear about how refinancing may benefit your financial situation, don’t be afraid to reach out to a mortgage broker or financial advisor for help.

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